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Rational Mutual Fund and ETF Selection

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Rational selection of equity and bond mutual funds and ETFs – An Overview

Given the extremely large variety and number of available fixed income and equity investment mutual funds and ETFs, investors need a rational basis to select among them. Without scientific selection criteria and a good understanding of which factors are more or less likely to increase risk-adjusted returns, investors will make erroneous decisions based on false assumptions.

Most individual investors want to select bond and equity mutual funds and exchange-traded funds (ETFs) to hold for a long duration.

Many would also like to invest additional amounts automatically into these funds over time and not to have to monitor them frequently. These investors are less concerned about short-term fluctuations than about their longer-term capital appreciation goals. In addition, of course, they hope to choose mutual funds and ETFs with exceptional performance and to avoid funds that consistently trail the pack.

Such investors want to use mutual screening or selection criteria to identify better funds and to minimize the need for frequent changes due to inferior performance. Individual investors are better served, if they understand what the scientific investment literature says about potential selection criteria.

These articles discuss valid fund screening and selection criteria:

  1. Avoid mutual funds and ETFs with sales commissions and 12b-1 fees
  2. Choose mutual funds and ETFs with lower investment management expenses
  3. Avoid mutual funds with higher investment portfolio turnover
  4. Avoid very large actively managed mutual funds
  5. Choose sufficiently mature mutual funds and ETFs
  6. Choose mutual funds with a minimum economical portfolio size
  7. Evaluate historical investment performance, but only after using other investment screening criteria

To implement these investment fund selection criteria, you need on-line fund screening applications supported with up-to-date data.

The Skilled Investor has also provided overviews of some investment fund screening applications and databases that are available on the web.

Many of these selection criteria are associated with investment costs, which are a dominant issue in efficient personal investment management. Click here for more articles on investment costs: Controlling Investment Costs

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